Looking Into the Future: Here's My 2025 Stock Pick
I considered, but did not go with, quantum computing, settling on this Sarge favorite instead.
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Longtime readers know darned well that I hate doing "stock pick of the year" articles. I have had winners and losers when it comes to these picks. That much I know. Several years ago, I followed up a year where I had picked a real winner, which was Lam Research LRCX, with one of Lam's competitors, KLA Corp KLAC. Needless to say, KLAC did not have a good year that next year. While I whine about doing these pieces, it's fairly obvious that I crushed 2024 with perhaps my best "stock of the year" ever.
In December 2023, I gave you Palantir Technologies PLTR for 2024. That's after having been a bull in the name for several years. Now, with one trading session left in the year, PLTR is up 349.5% year to date, while the S&P 500 and Nasdaq Composite are up 23.8% and 29.8% respectively. All hail the mighty Sarge, who picked the winner of winners for 2024. I'd like to pause now and pat myself on the back ... OK, I'm done. What about 2025?
Drum Roll, Please ...
My stock pick for 2025, for the second year in a row, is Palantir Technologies. Why? Because the deals keep rolling in. Because so many of these deals are made with the federal government with a focus on national security. Because the business of the corporate side is growing rapidly, as well. Palantir seems to be the one, or at least one of the few firms on the software side, that have figured out how to best monetize the still coming revolution in generative artificial intelligence.
Yes, the race into AI has gotten ahead of itself for most companies, but not for Palantir. The big-data-focused AI revolution is the next industrial revolution. True, I thought about going with a quantum computing firm such as Quantum Computing Inc. QUBT, but in my heart, I feel that quantum is going to be a 2026 or 2027 story. While I am in that space and expect to stay there, at this point, I feel that Palantir is a generational investment. I have been adding to my long position in PLTR for years, both for the "Stocks Under $10" portfolio before that product offering was terminated and for myself and my descendants since. Our net basis with the Stocks Under $10 portfolio had a $6 handle. That's a 12-bagger for those keeping score.
Analysis
Yes, I still have a $90 target price on the stock. Readers know that when my target prices are breached, that I take a little something off, hoping to add again a little lower and then set a new target price based on the direction of the trend and the technical setup if one is apparent. I started 2024 with a $27 target price on PLTR. This morning, Wedbush 5-star analyst Dan Ives named his Top 10 tech winners for the AI Revolution for 2025.
Palantir was No. 3 on his list behind Nvidia NVDA and Microsoft MSFT. Both of those are Sarge longs as well. Microsoft has lagged the rest of the Magnificent Seven tech stocks, and the major equity indexes this year and was very seriously considered as a potential subject for this article. According to TipRanks, the average target price for PLTR among the top 12 analysts covering the name is $45.64.
Guess I'm almost alone on this one among professionals. That's alright, I was almost alone among professionals on this name last year, too. I say "almost" because Keith Fitz-Gerald, an independent investor who appears often at Fox Business and has a loyal following on Twitter has also been in this stock since single digits.
Earnings
Palantir is expected to report fourth-quarter earnings on or close to Feb. 5. Wall Street is now looking for an adjusted earnings per share of $0.11 on revenue of roughly $777 million. If realized, those numbers would be good for earnings growth of 37.5% on revenue growth of 28%. Since the start of the quarter all 12 top ranked analysts that cover the name have revised their numbers higher.
For fiscal 2025, Wall Street is looking for an adjusted EPS of $0.47, which if Q4 2024 lands upon consensus, would be good for growth of 29%. Wall Street is also looking for full year fiscal 2025 revenue of $3.48 billion, which would amount to growth of 24.4% if Q4 fiscal 2024 expectations are spot on.
Is the Stock Expensive?
Some say it is. Trading at 161-times forward-looking earnings, one might think so. At 70-times sales and 39-times book, the quick answer, especially from someone like myself who does value fundamental analysis, would be "yes." That said, despite that I am clearly biased, I think the market may be pricing in not just next year for this true "growth" stock, but the next era. This has the potential to be a runaway high-margin business.
Will there be competition? Of course. Nobody stays way out in front of the pack forever. Nvidia is probably going to face better competition on the hardware side than it has. Marvell Technology MRVL, Broadcom AVGO and Advanced Micro Devices AMD are all knocking on that door. The same will happen in this space, but for right now, is a firm like Snowflake SNOW on Palantir's level? Not in my opinion. Plus, Palantir has something the others do not. CEO Alex Karp is both brilliant and perfect for this specific job in a Satya Nadella-kind of way. The kind of smarts that makes other smart people shut their pie holes and listen.
Actual Fundamentals
For the trailing 12 months as of the end of the third quarter, Palantir generated operating cash flow of $994.7 million, out of which came capital spending of just $14.4 million, leaving free cash flow of $980.3 million. The company has not returned capital to shareholders.
Turning to the balance sheet, the company ended the third quarter with a cash position of $4.565 billion and current assets of $5.352 billion. Current liabilities added up to $944 million, which included no shorter-term debt and unearned revenue of $237 million, which is not a true financial obligation. At that time, the firm's current ratio ran at 5.64. Adjusted for unearned revenue, that ratio rises to 7.57. These ratios are strong to the point of absurdity for a member of both the S&P 500 and the Nasdaq 100.
Total assets amounted to $5.768 billion. The company enters no value for anything intangible, which is both admirable and incredible. Total liabilities less equity came to $1.177 billion, which includes no long-term debt. That's right. There is no debt on the books. This is one of the strongest balance sheets anywhere in corporate America, especially for the company's size. Palantir is a cash flow and balance sheet beast.
The Chart
Readers may note that the stock's daily moving average convergence divergence indicator has just gone bearish.
In my opinion, that's OK. This happened in very early November as well and that was clearly an opportunity to get long or get longer. Relative strength is stronger than neutral as the stock wobbles into the end of the year. There is some profit taking going on in this environment, which is a natural byproduct of having had a great year.
The trend is still upward sloping and nowhere near cracking. If there should indeed be a crack, the 21-day exponential moving average at $74, the 50-day simple moving average at $62 are lined up as support levels that could maintain said trend. I will definitely add in between the two and down to the latter give an opportunity.
Final Thought...
I am in Palantir not just for myself, but for my children and for their children. Can that change? Everything can always change. That's why I keep you up on what I am thinking and what I am doing. Now, have a happy and healthy New Year, my friends, to you and yours.
Long live Rock & Roll.
At the time of publication, Guilfoyle was long PLTR, QUBT, NVDA, MSFT, AMD equity.
